Jessica Farrow was hired by Global Communications in 1996. The company has a defined benefit pension plan that specifies annual retirement benefits equal to: (1.5% x service years x final year’s salary) Farrow is expected to retire in 2035 after 40 years service. Her retirement period is expected to be 20 years. At the end of 2005, 10 years after being hired, her salary is $100,000. The interest rate is 6%. The company’s actuary projects Farrow’s salary to be $400,000 at retirement. What is the company’s VBO, ABO, PBO with respect to Jessica Farrow? ------------- skipping all the PBO calculations …Why is the ABO = PBO/4 ? is it because current salary / total projected salary = 100k/400k = .25?
current salary projected to calculate the ABO would be 1.5% * 10 * 100000 current salary projected to calculate PBO = 1.5% * 10 * 400000 hence the .25 factor…
and what would the VBO be?
VBO would be = ABO assuming Jessica is a vested employee. If she is not, VBO=0.
Thanks for verifying
Numbers? PBO = .015 * 10 * 400,000 = 60,000 Would this imply the PV of the Pension = $688,195? ABO = .015 * 10 * 100,000 = 15,000 And the PV of this Pension = $172,048 ---- I don’t think I did this right… can someone check/confirm?
got this wrong… will repost after I get it right.
PBO: PMT=60000 N=20 (will be paid 60 K for 20 years after retirement) I/Y=6 Calculate PV = 688195.27 Now this is due after 30 years from 2005. So in 2005 --> what is its present value - that would be the PBO FV=688195.27 N=30 I/Y=6 CPT PV = 119821.77 what is its present value - that would be the ABO FV=172048.827 N=30 I/Y=6 CPT PV = 29955.44
Ahh right, I forgot to discount it back to the present day. Thanks for the walk through cpk123.